8–11-1© 2012 The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

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Accountingfor Purchases

and Accounts Payable

Accountingfor Purchases

and Accounts Payable

Section 1: Merchandise Purchases

Chapter

8

Section Objectives

1. Record purchases of merchandise on credit in a three-column purchases journal.

2. Post from the three-column purchases journal to the general ledger accounts.

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The Accounting Departmentreceives the invoice and copies of the purchase order and receiving report

The Purchasing Departmentissues an authorized purchase order and sends it to the selected supplier

The Sales Departmentsends an authorized purchase requisition to the Purchasing Department

A receiving report is prepared when the merchandise is received

Purchasing Procedures

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This is a sales invoice for the seller

This is a purchase invoice for the customer

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The Purchases account is an account used to record cost of goods bought for resale during a period.

ANSWER:

QUESTION:

What is the Purchases account?

Wow! I need to order more

inventory!

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Account Classifications

Assets Liabilities Owner’s Equity Revenue Expenses

The Purchases account is under a different classification:

Recall the major account classifications from earlier chapters:

Cost of Goods Sold

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The Freight In account is an account showing transportation charges for items purchased. It is also called Transportation In account.

ANSWER:

QUESTION:

What is the Freight In account?

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Dr. Cr.

600

Cr.Dr.

550

Purchases

Cr.Dr.

50

Freight In+ =

Cost of Goods Sold

Total invoice (credit Accounts Payable) $600.00

Price of goods (debit Purchases) $550.00

Freight charge (debit Freight In) 50.00

The cost of goods sold accounts have normal debit balances

Accounts Payable

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These four general journal entries require twelve separate postings to general ledger accounts. It takes a great deal of time and effort to post them

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2. In the Accounts Payable Credit column, enter the total owed to the supplier.

Objective 1Record purchases of merchandise on credit in a three-column purchases journal

1. Enter the date, supplier’s name, invoice number, invoice date, and credit terms.

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3. In the Purchases Debit column, enter the price of the goods purchased .

4. In the Freight In Debit column, enter the freight amount.

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Examples of Credit Terms Net 30 days or n/30:

Payment in full is due 30 days after the date of the invoice.

Net 10 days EOM, or n/10 EOM:

Payment in full is due 10 days after the end of the month

in which the invoice was issued.

2% 10 days, net 30 days; or 2/10, n/30:

If payment is made within 10 days of the invoice date, the

customer can take a 2 percent discount. Otherwise, payment in full is due in 30 days.

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The purchases journal simplifies the posting process

Summary amounts are posted at the end of the month

Objective 2 Post from the three-column purchases journal to the general ledger accounts

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1. Locate the Accounts Payable ledger account.

2. Enter the date.

3. Enter the posting reference.

4. Enter the amount from the Accounts Payable Credit column in the purchases journal in the Credit column of the Accounts Payable ledger account.

5. Compute the new balance and enter it into Balance Credit column.

6. In the purchases journal, enter the accounts payable ledger account number under the column total.

7. Repeat the steps for the Purchases Debit and Freight In Debit columns

Post from the Purchases Journal to the general ledger in seven steps.

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Advantages of a Purchases Journal

Allows for the division of accounting work among different employees

Strengthens the audit trail

Records all credit purchases in one place

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Accountingfor Purchases

and Accounts Payable

Accountingfor Purchases

and Accounts Payable

Section 2: Accounts Payable

Chapter

8

Section Objectives3. Post credit purchases from the purchases journal to the

accounts payable subsidiary ledger.

4. Record purchases returns and allowances in the general journal and post them to the accounts payable subsidiary ledger.

5. Prepare a schedule of accounts payable.

6. Compute the net delivered cost of purchases.

7. Demonstrate a knowledge of the procedures for effective internal control of purchases.

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The Accounts Payable Ledger

The accounts payable ledger has three money columns.

The Balance column is presumed to contain credit amounts.

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Objective 3

Post credit purchases from the purchases journal to the accounts payable subsidiary ledger

To keep the accounting records up to date, invoices are posted to the accounts payable subsidiary ledger every day.

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Enter the date, invoice number and date, and the page number from the purchases journal.

1 2

3

Steps to post to the accounts payable ledger

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From the purchases journal, write the dollar amount of the purchase in the credit column of the subsidiary ledger. Recalculate the current balance in the ledger. Enter the check mark in the Post. Ref. column back in the journal to indicate that the transaction is posted in the ledger.

4

5

1 2

36

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The cash payment is then posted to the individual creditor’s account in the accounts payable ledger

Posted from page 1 of the cash payments journal

Cash Payments are posted as debits in the A/P Ledger.

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Objective 4

Record purchases returnsand allowances in the general journal and post them to the accounts payable subsidiary ledger

A purchase return is a return of unsatisfactoryGoods previously purchased for resale.

Sorry, I didn’t like the color.

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Purchases Returns and Allowances

A credit to the Purchase Returns and Allowances account is made when a vendor returns something to a supplier

Returns and

Allowances

A complete record of returns and allowances

A contra cost of goods sold account

Normal credit balance

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On January 30 Maxx-Out Sporting Goods received a credit memorandum for $100 from International Sportsman as an allowance for damaged merchandise.

Business Transaction

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Purchase Allowance

Accounts Payable

100

Purchases Returns and Allowances

100

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Posting from the General Journal

Enter the amount of the return or allowance in the Debit column of the creditor’s account. Update the balance.

Enter the date, the credit memorandum number, and the general journal page number.

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The total of the individual creditor accounts in the subsidiary ledger must equal the balance of the Accounts Payable control account.

To prove that the control account and the subsidiary ledger are equal, businesses prepare a schedule of accounts payable.

Objective 5 Prepare a schedule of accounts payable

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A comparison of the total of the schedule of accounts payable and the balance of the Accounts Payable account shows that the two figures are the same.

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The income statement of a merchandising business contains a section showing the total cost of purchases.

This section combines information about Cost of the purchases Freight in Purchases returns and allowances

Objective 6 Compute the net delivered cost of purchases

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The net delivered cost of purchases for Maxx-Out Sporting Goods for January is calculated as follows.

Net Delivered Cost of Purchases $18,695

Purchases $ 17,540

Freight In 1,255

Delivered Cost of Purchases $ 18,795

Less Purchases Returns and Allowances 100

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• create written proof that purchases and payments are authorized, and

• ensure that different people are involved in the process of buying goods, receiving goods, and making payments.

The objectives of the controls are to:

Objective 7 Demonstrate a knowledge of the procedures for effective internal control of purchases

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2. Goods should be carefully checked when received. They should then be compared with the purchase order and with the invoice received from the supplier.

3. The purchase order, receiving report, and invoice should be checked to confirm that the information reflected on the documents are in agreement.

1. All purchases should be made only after proper authorization has been given in writing.

Effective systems have the following controls in place:

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5. Authorization for payment should be made by someone other than the person who ordered the goods, and this authorization should be given only after all the verifications have been made.

6. Another person should write the check for payment.

4. The computations on the invoice should be checked for accuracy.

7. Prenumbered forms should be used for purchase requisitions, purchase orders, and checks. Periodically the numbers of the documents issued should be verified to make sure that all forms can be accounted for.

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Thank Youfor using

College Accounting, 13th Edition

Price • Haddock • Farina